An increase in wealth that doesn't affect labor supply would cause the IS curve to ________ and the FE line to ________.
A)shift down and to the left; be unchanged
B)shift down and to the left; shift left
C)shift up and to the right; be unchanged
D)shift up and to the right; shift left

Question

Quizplus · Accepted Answer

An increase in wealth that doesn't affect labor supply would increase consumption, which in turn increases output and leads to an upward shift in the IS curve. However, as labor supply remains unchanged, the economy would operate at the same level of potential output, and thus the FE line would be unchanged. Therefore, the correct option is C – shift up and to the right for the IS curve and be unchanged for the FE line.

An Increase in Wealth That Doesn't Affect Labor Supply Would